Stagflation and weak investor confidence are affecting the European property market. According to the report, 'The Lighthouse H2 2023 - European Property Market Outlook' by BNP Paribas REIM, the European property markets are still reacting to the new environment created by the increase in financing costs and the price adjustment that began at the end of 2022. Here are the seven forecasts for the end of 2023.
European investors in search of real estate value
According to BNP Paribas REIM, the current level of outstanding transactions does not bode well for a recovery in market activity in the short term, and the price discovery phase could last until 2023. Moreover, the rise in yields could continue until the end of 2023, when central banks are expected to stop tightening their monetary policies. Investors should, therefore, pay attention to several factors in this rebalancing phase.
- Focus more on liquid markets and understand which sectors to concentrate on to optimise risk and return.
- Assess the long-term fair value of assets, as the market is likely to remain fairly cyclical.
- Pay attention to sustainable investments, as real estate projects need to incorporate sustainable practices to be more attractive and profitable in the long term.
- Consider the obsolescence of assets, not only in reaboutate change but also in terms of location, function and economics.
- Do not neglect assets requiring minor improvements, as refurbishment could prevent functional or economic obsolescence.
European real estate, the best asset in 2023
On the other hand, investors should also focus on portfolio diversification to reduce portfolio volatility. In this respect, residential and healthcare assets represent good opportunities within this strategy, as they have proven to be more resilient during the current upswing and should be among the best performers over the next five years.
The healthcare market particularly benefits from a good long-term demand outlook, driven by macro trends that will not be affected by the current economic slowdown, such as an ageing population or an increase in chronic diseases.
In addition, logistics and hospitality represent high-risk/reward options for investors. A pick-up in discretionary experiential spending should benefit the hospitality sector, especially health and wellness-focused hospitality, such as yoga, meditation or spa resorts, and nature-focused tourism, including camping.
European market forecasts in 2023
On the other hand, according to the report, the new economic environment that started at the end of 2022 is expected to continue through 2023 with high inflation and interest rates. This will hinder European real estate market recovery, as it affects financing conditions and investor sentiment.
Laurent Ternisien, Chief Client Officer of BNP Paribas REIM, said investors 'are adopting new strategies to adapt and diversify their portfolios'. They should focus on more liquid markets and sustainable assets 'as well as property types driven by macro trends immune to the current environment', such as 'ageing populations, urbanisation and increasing household formation'.
With this in mind, the main real estate forecasts for 2023 are as follows:
- Financing conditions will determine the recovery. High inflation and the US banking crisis have not weakened Europe's economic outlook, but lenders and borrowers remain highly risk averse. As a result, debt flows could continue to decline and weigh on investment activity in Europe through 2023.
- The European real estate sector has yet to assess short-term risks. Yields are rising rapidly to cope with higher debt costs. In this respect, the UK is the most advanced in this revaluation phase, followed by the rest of Europe. The timing and height of the peak in central bank interest rates is still unclear, and the risk of large-scale refinancing and repayment of funds could exacerbate and prolong the repricing phase of prime assets.
- Redefine core investments to avoid stranded assets and secondary markets. Secondary assets can experience a price drift over many years and across all property types. Small but significant market sectors can run aground and cease to be core. At the same time, core-plus and value-added investors can identify many assets in established markets worth investing in to improve and make them sustainable.
- Pending prime office yields to rise again. The fundamentals of occupancy in the European office market are in a much stronger position than in the US. However, even within European cities, strong micro-location is essential. Buyers are waiting for debt costs and equity yields to return to sustainable spread levels. Prices should stabilise over the next six to twelve months, but investment volumes will remain at historic lows.
- Seek protection against future recessions. No real estate category is exempt from appreciation, but healthcare and residential sectors seem to have held up better, benefiting from long-term macro trends, such as demographics. Investors have been more inclined to investing in the long term. Both sectors are demonstrating their potential to reduce portfolio risk in a market that could be characterised by increased volatility in the future. Operator risk remains a key consideration in the healthcare and managed residential sectors.
- Investments in logistics require careful analysis and quick decisions. In any case, logistics will be the best-performing sector over the next five years. However, e-commerce is unlikely to sustain the double-digit rental growth experienced recently. Investors must, therefore, rely on the future reversibility of rents and the sustainability of building performance. Buyers can be expected to compete fiercely with each other.
- The rebound in discretionary spending should favour hospitality. Middle-income households are more likely to spend more on experiences. Thus, the hospitality sector is on the verge of a full post-pandemic recovery, although budget and mid-range hotels, especially those reliant on business travel, may continue to struggle. Camping and outdoor holidays will continue to be popular, as will luxury and high-end hotels.
